The Balanced Scorecard

Linking Operations to Strategy

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Information for Guiding Operations

 Decisions cannot be based solely on financial

information
 Much quantitative information cannot be reduced
to monetary amounts
 Much information cannot be quantified
 Much information provides feedback but not
guidance

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Criticisms of Traditional Measures

 Lack of relevance
 Many measures are interesting, but not useful
 Market share, revenue, etc.
 Trends may be useful

 Measures may be poorly designed or collected

 Customer satisfaction, employee morale, etc.

 Goals are arbitrarily determined, beyond the

ability of the system
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Criticisms of Traditional Measures

 Lack of vision
 Short-term focus impedes decisions with long lead
times or long-term payoffs
 Focus on what is currently being done, not what
should be done
 Fail to consider the overall organization

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Criticisms of Traditional Measures
 Promote detrimental outcomes
 Short-term thinking
 Local optimization
 Manipulation of operations or measures
 Well-intentioned but detrimental actions

 “The numbers these systems generate often fail to support

the investments in new technologies and markets that are
essential for successful performance in global markets”
Eccles, p. 28

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Signs of an Ineffective Performance
Measurement System
 Performance is acceptable on all dimensions
except profit
 Measures are not aligned with strategy
 Measures do not reflect critical success factors

 Competitive price, but customers do not buy

 Functionality or quality may be more important to
the customers

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Signs of an Ineffective Performance
Measurement System
 No one notices if the measures are not
produced
 Not using them anyway
 Irrelevant
 Redundant
 Questionable
 Managers debate the meaning of the
measures
 Measures are confusing

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Signs of an Ineffective Performance
Measurement System
 Share price is lethargic despite solid financial
performance
 Measures are backward looking
 Share price reflects future expectations
 The market expects that current performance will not
continue

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Signs of an Ineffective Performance
Measurement System
 Have not changed the measures or targets in
a long time
 Obsolete, easily met, do not foster change

 Corporate strategy has changed

 Measures become irrelevant

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The Balanced Scorecard

 Performance measurement and guidance tool

 Balance between
 Measures of current performance and long-term
competitive abilities
 Feedback and guidance
 Financial and non-financial measures

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The Balanced Scorecard
 Four aspects of firm performance
 Financial
 Internal business processes
 Customer
 Innovation and learning

 Some entities may use more or less than four perspectives

depending on their unique situations

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The Balanced Scorecard

 Financial perspective
 How is the company doing financially?
 Traditional financial measures
 Operating income
 Cash flow
 Revenue growth
 Stock price
 Etc.

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The Balanced Scorecard

 Internal business perspective

 At what must the company excel currently?
 Manufacturing or service excellence
 Backlogs
 Cycle time
 Quality
 New product or service introductions
 Etc.

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The Balanced Scorecard

 Customer perspective
 How do our customers view the company?
 Responsiveness to customer desires
 Market share
 Customer satisfaction
 Customer retention
 Customer’s perception of the company and its products
 Etc.

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The Balanced Scorecard

 Innovation and learning perspective

 Can the company continue to create value?
 Technological leadership
 Research and development
 Employee training
 Employee satisfaction
 Investments in new technologies
 Etc.

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The Balanced Scorecard

 The four perspectives are interrelated

 Not a random collection of measures
 Emphasizes the synergies and relationships
existing within the company and with its customers
 Innovation and learning results in better products
and internal processes which please customers
which then results in positive financial results
 Strategy map

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Designing a Balanced Scorecard

 Step 1: Develop company strategy

 Measures must relate to the strategy
 Reflecting the critical success factors
 Measures must be interrelated
 Must understand how the perspectives influence each
other
 Organization-wide view replaces local focus

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Designing a Balanced Scorecard

 Step 2: Determine critical success factors

(goals)
 What must be achieved to survive, or what will
cause the company to fail if it is not achieved?
 Determine success factors for each of the four
perspectives
 Limit the number to items that are critical, not just
interesting

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Designing a Balanced Scorecard

 Step 3: Determine the activities that drive the

achievement of the critical goals
 Must understand the linkages between the
activities and the goals
 Will this activity help us achieve the desired goal?

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Designing a Balanced Scorecard
 Step 4: Develop metrics to evaluate
performance
 Provide feedback and also indicate problem areas
 Metrics may be financial, non-financial, trends,
surrogates, internally or externally gathered, etc.
 Should include leading and lagging measures
 May not be “exact”

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Designing a Balanced Scorecard
Critical
Strategy Success Activities Measures
Factors
Fedex
Strategy – produce superior financial returns by providing high value-
added supply chain, transportation, business and related services…

CSFs – stock price growth, on-time delivery…

Activities – increase operating income by reducing fuel usage, deliver

packages to central sorting facility by midnight…

Measures - fuel usage, acquisition of, or commitments to acquire, more

fuel efficient planes, percent of packages arriving late…

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Designing a Balanced Scorecard

 Not a quick process

 May take months to accomplish
 Thought and analysis of strategy, critical success
factors, activities, metrics
 How do the pieces fit together?

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Designing a Balanced Scorecard

 Requires teamwork and collaboration

 Different perspectives and expertise are required
 No one individual has a complete view of the
organization

 Greater participation produces greater “buy-in”

 Employees have a sense of ownership in the resulting
scorecard
 More likely to use the scorecard to guide their decisions

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Implementing a Balanced Scorecard

 Initiative must start with senior management

 Understanding of overall strategy
 Authority to make strategic decisions
 Commitment level will determine success or failure
 The project may fail if senior management does not show
continued interest and support in the design process
 The scorecard will be ignored if management does not
promote its use for performance evaluation and guidance

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Implementing a Balanced Scorecard

 Link to databases and information system

 Modify information system if necessary to collect
and report the metrics
 What data is available? What is not available?
 How should it be collected? How often?
 The scorecard should determine what data is collected
 The data available should not determine the scorecard
 Determine reporting procedures
 Who gets the information? How is it reported? How
often is it reported?
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Implementing a Balanced Scorecard

 Communicate to employees
 What is being measured
 Why it is being measured
 What is expected of the employees
 How to use the information
 Develop scorecards for lower levels
 Want the employees to understand what they
must do to support the level above
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Implementing a Balanced Scorecard

 Periodic reviews
 The scorecard must evolve with the company
 Has company strategy changed?
 Are the critical success factors still valid?
 Are the activities still valid?
 Are the metrics still valid?

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The Road to Disaster

 Senior management is not committed

 No one else will be

 Lack of consensus
 Lack of commitment

 Poor use of consultants

 Provide expertise, but cannot take over the project
without employee input

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The Road to Disaster

 Failure to communicate to employees

 Risks “business as usual”

 Lack of “push down”

 Lower levels continue to operate as before
 The scorecard cannot stay in the boardroom

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The Road to Disaster
 Carve it in stone
 It will not ever be perfect

 Poorly designed scorecard

 Will not see strategic improvements even if
individual measures show progress
 The activities are not linked to strategy

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The Scorecard as a Change Agent

 The scorecard should be used to guide future

operations and decisions
 Four steps
 Translate the strategy into action
 Communicating and linking
 Business planning
 Feedback and learning

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The Scorecard as a Change Agent

 Translating the strategy into action

 Strategy must be reduced to a set of quantifiable
goals and measures that can be operationalized
 “We want to be the best” will not do

 Communicating and linking

 Strategy must be communicated to all levels
 Lower levels are the foundation on which the rest of the
organization is built

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The Scorecard as a Change Agent
 Business planning
 Integrate the financial plan with the business plan
 Use the scorecard to allocate resources to critical
activities
 Assures critical activities receive adequate resources
 Avoids the short-term spending mentality

 Feedback and learning

 Monitor short-term results to determine if progress
is being made toward long-term goals
 May need to refine the scorecard
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Analysts’ “Top 10” List

 Ernst and Young study of financial analysts’

use of non-financial measures
 Improves earnings forecasts
 35% of a company’s valuation is attributable to
non-financial information

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Analysts’ “Top 10” List

 The “Top 10”

 Ability of the company to execute its strategy
 Credibility of management
 Does the company do what it says it will do?

 The quality of the strategy

 Will management’s vision create future value?

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Analysts’ “Top 10” List
 Innovativeness
 How readily does the company adapt to changing
technologies and markets?

 Ability to attract and retain talented people

 Market position
 How quickly can the company realize sales, profits and
cash flow from products introduced in the prior three
years?
 How strong is the company’s brand?

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Analysts’ “Top 10” List
 Management experience
 What skills and experiences does the management team
bring to the organization?
 What is their success rate in similar situations?

 Executive compensation
 Are compensation policies aligned with strategy?
 How many executives have their pay tied to value
creation?

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Analysts’ “Top 10” List
 Quality of major processes
 How well does the company execute its strategy?
 Does it have plans and processes that enable it to adapt
to changing market conditions?

 Research leadership
 How well does the management understand the link
between creating knowledge and using it?
 R&D budget as a percent of sales, profits and cash flow

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